From Briefing.com: 4:51 pm Weekly Wrap
Stunning is a word that sums up this week's action. It fits because it can be used in proper context for all parties involved in the capital markets, regardless of whether they held short or long positions.
The behavior of stocks? Stunning. The behavior of Treasuries? Stunning. The behavior of commodities? Stunning. The behavior of currencies? Stunning. The behavior of the government? Stunning.
Recounting all that transpired with sufficient detail would make this wrap a rival to War and Peace in length. Accordingly, we'll spare you the nitty-gritty and will focus on the larger happenings.
To begin, the week began with a washout of sorts as the market dropped 4.7% in the wake of reports that investment bank Lehman Bros. was filing for bankruptcy, that Merrill Lynch (MER) agreed to sell itself to Bank of America (BAC) in a hastily arranged transaction, and that insurer AIG (AIG) might be headed for bankruptcy if it couldn't raise a large amount of capital in a hurry.
The focus on the financial sector on Monday was apropos since the Wall Street universe revolved all week around that area, which was both a black hole and shining star depending on the day, or even the hour, one looked at it.
All other developments, like a warning from Dell (DELL) about slowing demand, a disappointing earnings report from Best Buy (BBY), a reassuring report on consumer inflation, and a decision by the FOMC to leave the fed funds rate unchanged, were a distant second to the behavior of the financial sector and the credit market, which were inextricably linked.
After recouping a portion of Monday's losses on Tuesday, the market suffered another seizure Wednesday, dropping 4.7% in the wake of news the Fed agreed to a 2-year, $85 billion secured loan for AIG. Although that loan was structured on very attractive terms for the Fed, the major concern for the market Wednesday was that it failed to do anything to put the credit market at ease since it didn't fix the underlying problem.
Strikingly, the TED spread, which is a barometer of credit risk and is the difference between the 3-month Libor rate and the 3-month T-bill rate, blew out to 302 basis points. That level compared to a 135 basis point spread the preceding Friday and marked the widest spread since just before the stock market crash in 1987.
Other credit spreads also widened considerably, particularly the spreads on credit default swaps for investment banks Morgan Stanley (MS) and Goldman Sachs (GS). That widening reflected heightened anxiety about their ability to repay their debt which, in turn, reflected a pressing concern that those firms were at risk of going the way of Bear Stearns and Lehman Bros.
From their close last Friday to their lows for the week, the stocks of Morgan Stanley and Goldman Sachs plummeted 69% and 44%, respectively. Remarkably, that move occurred despite both firms posting better than expected fiscal third quarter earnings results.
Their losses were indicative of some of the panic selling that took place during the week as participants fretted about the government's inability to stem a collapse in the financial system (more on this in just a bit). That selling was exacerbated, too, by reports that the value of the Reserve Primary Fund, which is a money market fund, broke below $1.00 per share, an extremely rare happening for a money market fund.
The confluence of the disconcerting headlines surrounding the financial sector precipitated a massive flight-to-safety bid in gold and the U.S. Treasury market.
At their high on Thursday, gold futures were up $161.50, or 21.1%, from their close last Friday. Meanwhile, the yield on the 3-month T-bill hit 0.02% on Wednesday, marking a 149 basis point drop from where it went out last Friday.
The fear in the market was palpable. For traders it manifested itself in the VIX Index, commonly referred to as the fear gauge, which hit its highest level in six years Thursday.
Thursday and Friday, frankly, were two days for the trading ages.
Thursday began well enough as stocks initially reacted favorably to reports of a coordinated effort among central banks to inject more dollars into the global financial system. Those good feelings proved to be fleeting. Stocks rolled over upon seeing there had been no real improvement in the credit market and upon hearing more worrisome headlines about money market funds.
In an instant, though, the tone of the market again changed in favor of the bulls when the U.K. announced a temporary ban on the short-selling of financial stocks.
Sensing that the SEC might follow suit in the U.S., a short-covering rally ensued. However, it wasn't until a report late in the day that Treasury Secretary Paulson was entertaining the idea of a financial system fix equivalent to the Resolution Trust Corporation solution used during the S&L crisis that stocks really took off.
From its low on Thursday to its close, the S&P surged 6.4%.
Sure enough, Friday brought a tidal wave of news regarding government proposals to return stability to the financial system.
In particular, the SEC banned short-selling of 799 financial stocks until Oct. 2 and the Treasury provided a guaranty program for money market mutual funds. The big game changer, though, was a proposal put forth to have the government (er, the tax payer) take the illiquid mortgage assets off the balance sheets of financial companies.
Administrative officials and Congressional leaders intend to work over the weekend to iron out specific details of the plan, but it was clear in Friday's session that participants liked the implications of what was being discussed since it got to the heart of implementing a comprehensive and targeted solution to fixing the root of the financial system's problems, which is housing and mortgage-related assets.
By implementing a program that removes the illiquid assets from the balance sheet of the financial companies, the government is literally buying the time that is necessary to turn the illiquid assets into liquid assets again through a more rational price discovery process.
The cost of the program won't be cheap. Secretary Paulson estimates it will run into "the hundreds of billions of dollars" since it has to be sufficiently large to have a maximum impact. However, the cost entails buying actual assets which can deliver cash flow, possibly in excess of the amount of the price the government will pay.
Time will tell, but the thinking that this plan can succeed in stabilizing the financial system and the housing market translated into heavy buying interest Friday. In fact, Friday's session, which also happened to be a quarterly options expiration day, saw the most volume (2.98 bln shares) ever traded at the NYSE.
For some perspective on the magnitude of the rebound over the final two days, consider the following: from their low on Thursday to their high on Friday, the Dow, Nasdaq, S&P 500, Russell 2000 and S&P 400 Midcap Index surged 9.8%, 12.0%, 11.6%, 13.2% and 12.0%, respectively. As an aside, the stocks of Morgan Stanley and Goldman Sachs rebounded as much as 189% and 69%, respectively, from trough to peak.
If two lessons are to be learned by investors from this week's action, it is that panic selling isn't a recommended portfolio management strategy and that you can't try to time the market. Neither works in the ongoing effort to build long-term wealth by investing in the stock market.
--Patrick J. O'Hare, Briefing.com
**For interested readers, the S&P 400 Midcap Index, which isn't included in the table below, was up 2.1% for the week and is down 6.2% year-to-date.
Index Started Week Ended Week Change % Change YTD
DJIA 11421.99 11388.44 -33.55 -0.3 % -14.1 %
Nasdaq 2261.27 2273.9 12.63 0.6 % -14.3 %
S&P 500 1251.7 1255.08 3.38 0.3 % -14.5 %
Russell 2000 720.26 753.74 33.48 4.6 % -1.6 %
12:15PM LDK Solar priced a follow-on offering of 4.8 mln ADSs, at a price to the public of $41.75 per ADS. (LDK) 41.75 -196 :
10:36 am Lam Research initiated with a Buy at Soleil; tgt $45: . Soleil initiates LRCX with a Buy and price target of $45 saying LRCX is their favorite pure-play in the capital equipment group with the industry's best business model. The firm sees current valuation as attractive near historical trough levels.
10:36 am Cymer initiated with a Buy at Soleil; tgt $35: . Soleil initiates CYMI with a Buy and price target of $35 saying they are convinced by current industry data that an 18-month-long deterioration of CYMI's market positions ended in 1Q'08 and that the co regained market share in 2Q'08, a quarter earlier than management expectations. They believe that this positive change in CYMI's market share is sustainable, and expect CYMI's performance in 2H'08 to exceed current consensus forecasts
11:40AM UltraShort Financials ProShares resumes trading (SKF) 93.56 -21.23 : SEF also resumes trading.
11:25AM UltraShort Financials ProShares are not expected to accept orders from Authorized Participants to create shares until further notice (SKF) 93.00 -22.44 : Due to the emergency action announced by the Securities and Exchange Commission on September 18, 2008, temporarily prohibiting short sales of shares of certain financial companies, Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF) are not expected to accept orders from Authorized Participants to create shares until further notice. Unless notified otherwise, shares will be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets today, but may trade at prices that are not in line with their intraday indicative values. (SKF, SEF and RFN are currently halted)
6:55AM SEC details on short selling of financial stocks to protect investors and markets : The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday. The Commission's action will apply to the securities of 799 financial companies. The action is immediately effective. SEC Chairman Christopher Cox said, "The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress." The SEC's emergency order will be immediately effective and will terminate at 11:59 p.m. ET on October 2, 2008. The Commission may extend the order beyond 10 days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration... The Commission also has taken the following steps to address the recent market conditions: Temporarily requiring that institutional money managers report their new short sales of certain publicly traded securities. These money managers are already required to report their long positions in these securities. Temporarily easing restrictions on the ability of securities issuers to re-purchase their securities. This change will give issuers more flexibility to buy back their securities, and help restore liquidity during this period of unusual and extraordinary market volatility.
08:51 am Oracle (ORCL)
Enterprise software maker Oracle (ORCL 18.75) posted strong fiscal first quarter sales growth while keeping costs under control, resulting in a solid increase in earnings that topped Wall Street's forecast. Shares are up 12% in premarket trading.
Oracle continues to dominate the database market with a 49% share. According to the company, its market share is more than the next four vendors combined.
Revenue rose 18% year-over-year to $5.42 billion, matching expectations. Software licenses and product support revenue climbed 23%. Services revenue rose 9%.
Oracle was able to limit operating expense growth below revenue growth, resulting in a 350 basis point expansion in non-GAAP operating margins to 40%, the company's highest ever.
The Redwood Shores, Calif.-based company saw non-GAAP earnings rise 32% year-over-year to $0.29 per share, or $1.5 billion. The results topped the average analyst estimate by two cents.
08:27 am SEC Halts Short-Selling of Financial Stocks
The SEC today announced a temporary and emergency action to halt the short-selling of financial stocks to "protect the integrity and quality of the securities market and strengthen investor confidence." The United Kingdom's regulatory body took similar actions yesterday.
The order follows extreme turmoil in the financial markets, with some believing the short-selling of financial institutions sparked a self-fulfilling prophecy, playing a role in the collapse and near collapse of several companies. As shorts drive the price of a stock down, it creates a decline in market confidence which can cause customers to pull funds out of the financial institution and counterparties to stop trading with the institution.
The SEC feels that recent short-selling has driven financial stocks prices unrelated to their true price.
The action covers 799 financial institutions, effective Sept. 19, 2008 and will end Oct. 2, 2008. The SEC may extend the plan longer, but will not extend it longer than 30 calendar days.
08:07 am U.S. Working on Bailout Plan
The U.S. government is working on the creation of a program to ease the financial market turmoil, sending stock market futures soaring.
The proposal includes the federal government buying troubled assets at a discount from financial institutions and placing them into a new government entity, according to reports. Fed Chairman Ben Bernanke and Treasury Secretary Paulson worked on the plan with bipartisan Congress leaders.
Exact details are not known, but it is expected that Congress will act quickly.
The government made a similar move in the late 1980s during the savings and loan crisis.
Another move taken by the Treasury includes the establishment of a temporary guaranty program for the U.S. money market fund industry. The Treasury will insure holdings of money market mutual funds that pay a fee to participate in the program. President Bush approved Paulson to make up to $50 billion available to guarantee payment.
The money market plan comes after money market funds, typically thought of as a cash equivalent, ran into liquidity problems, with some funds' net asset values falling below $1.
A late report that the government was working on a solution to the crisis sparked a 4% rally Thursday, and stock futures are indicating that the stock market will open with another 4% gain today. |
